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Securities and Exchange Commission v. Present

United States District Court, D. Massachusetts

March 20, 2018

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
HOWARD B. PRESENT, Defendant.

          ORDER ON MOTION FOR ENTRY OF FINAL JUDGMENT (DOC. NO. 357)

          LEO T. SOROKIN UNITED STATES DISTRICT JUDGE

         The Securities and Exchange Commission (“SEC”) brought a civil enforcement action against Defendant Howard Present for violations of the Investment Advisers Act of 1940 (the “Advisers Act”) and rules thereunder. Following a trial, the jury returned a verdict on October 5, 2017 in favor of the SEC. Doc. No. 353. Pending before the Court is the SEC's motion for entry of final judgment. Doc. No. 357. The SEC's motion is ALLOWED. For the reasons that follow, the Court enjoins Present from future violations of the Advisers Act and orders Present to pay (i) disgorgement in the amount of $10, 849, 604, (ii) pre-judgment interest on the disgorgement amount, and (iii) a civil penalty in the amount of $1, 575, 000.

         I. INJUNCTIVE RELIEF

         The SEC urges the Court to enjoin Present permanently from violating the Advisers Act provisions and related rules at issue in this action. Section 209(d) of the Advisers Act provides that, upon a showing that a person has engaged in an act or practice that violates the Act, a permanent injunction “shall be granted without bond.” 15 U.S.C. § 80b-9(d). Injunctive relief is appropriate where there is a “reasonable likelihood of recidivism[.]” SEC v. Sargent, 329 F.3d 34, 39 (1st Cir. 2003). In determining whether future violations are reasonably likely, courts consider, among other factors, the nature of the violation (including its “egregiousness and its isolated or repeated nature”), whether the defendant will be in a position to violate the law again, and whether the defendant has recognized the wrongfulness of his conduct. Id.

         These factors weigh in favor of injunctive relief. Based on the evidence presented at trial, the Court finds that Present's conduct was egregious. While AlphaSector was not a sham product (a fact weighing against injunctive relief), Present secured AlphaSector's success through false statements over a substantial period of time. Far from isolated instances, Present's misstatements were consistent in message, broadly disseminated, and increasingly bold. Moreover, the false statements multiplied due to Present's persistent disinterest in whether what he was advertising was truthful. The jury found that Present acted with scienter in the form of recklessness, defined as “an extreme departure from the standards of ordinary care, which presents a danger of misleading other persons that is either known to the defendant or is so obvious that the defendant must have been aware of it.” Present's recklessness lasted for most of the sales life of the AlphaSector strategy. It persisted in the face of pointed inquiry from investment professionals, among others. It arose despite his extensive familiarity with due diligence. Yet, only after Corey Hoffstein and Tom Rosedale raised the specter of legal action in July 2013 did Present inquire into whether the advertised pre-2008 returns were accurate and whether real client assets had in fact followed the strategy before AlphaSector's inception. Doc. No. 363 ¶ 10.

         Even now, Present declines to take responsibility for years of misleading clients and potential clients. He fails to understand the wrongfulness of having misrepresented the strategy. See, e.g., Present Affidavit, Doc. No. 363 ¶ 14 (“based on the live performance of the [AlphaSector] Indexes, this was a ‘victimless' violation”). Further, he blames his violations on Jay Morton. Id. ¶ 16 (“it was an isolated event, triggered by a third-party's fraud, and there were never any clients harmed”); id. ¶ 5 (characterizing his violations as “not engaging in enough due diligence to have discovered the truth of the matter”); id. (“my false statements were the direct result of fraudulent statements made to me verbally, in writing, and through contractual language from Jay Morton and his colleagues at NFR”). Nonetheless, Present bears independent, personal responsibility for his own independent conduct. Among other things, he recklessly made repeated false statements that lured cautious investors to trust their savings to an untested product that he represented as battle-hardened through two bear markets. His failure to recognize the harm of his misrepresentations, his sustained willingness to make ever-bolder statements without any support, and his inability to appreciate his own role in misleading investors now all indicate a reasonable likelihood of further violations.[1] A permanent injunction is therefore appropriate.[2]

         II. DISGORGEMENT

         The SEC seeks disgorgement by Present of $11, 524, 614, representing Present's earnings from F-Squared after 2009, [3] reduced by (i) an annual amount equal to Present's pre-AlphaSector compensation (approximately $115, 000 a year) and (ii) a “percentage arguably attributable to continued sales of AlphaCycle, ” assuming that the AlphaCycle product would have sustained F-Squared absent the intervening success of AlphaSector. Doc. No. 358 at 11.

         As an initial matter, Present contends that disgorgement is a penalty outside of the Court's equitable authority to order, in light of the Supreme Court's holding in Kokesh that disgorgement is a penalty for purposes of Section 2462. However, Kokesh's holding on the scope of Section 2462 does not undermine First Circuit precedent supporting a court's equitable power to prevent unjust enrichment by ordering disgorgement. See SEC v. Sargent, 329 F.3d 34, 41 (1st Cir. 2003) (distinguishing statutory civil penalties, which “are intended to penalize the defendant for illegal conduct, ” from equitable disgorgement, which “merely restores a defendant to his original position without extracting a real penalty for his illegal behavior” (internal citations omitted)). Moreover, no court has understood Kokesh to call such authority into question. See, e.g., SEC v. Metter, 706 Fed.Appx. 699, 702 (2d Cir. 2017) (addressing Kokesh and upholding disgorgement order); SEC v. Jammin Java Corp., 2017 WL 4286180 at *2-4 (declining “to upset decades of settled jurisprudence” supporting courts' equitable power to order disgorgement). This Court likewise concludes that its equitable power to order disgorgement remains intact.

         The Court has discretion to enter an order of disgorgement in an amount reflecting “a reasonable approximation of the profits causally connected to” Present's violations. SEC v. Happ, 392 F.3d 12, 31 (1st Cir. 2004) (quoting SEC v. First City Fin. Corp., 890 F.2d 1215, 1231 (D.C. Cir. 1989)). Disgorgement forces the defendant to give up the amount by which he was unjustly enriched, “even if it exceeds actual damages to victims.” SEC v. Cavanagh, 445 F.3d 105, 117 (2d Cir. 2006) (internal citation omitted). “The risk of uncertainty in calculating disgorgement should fall on the wrongdoer whose illegal conduct created that uncertainty.” Happ, 392 F.3d at 31 (internal citations omitted). “Once the SEC shows that the disgorgement is a reasonable approximation, the burden shifts to the defendant to demonstrate that the amount of disgorgement is not a reasonable approximation.” Id. (internal citations omitted).

         Having considered the parties' briefs and heard argument at a hearing on the SEC's motion, the Court concludes that the SEC's proposed disgorgement amount is a “reasonable approximation of profits causally connected to” Present's violations. Id. For purposes of its analysis, the Court considers separately (a) proceeds from AlphaSector from before September 2013, during which time F-Squared promoted AlphaSector using the misstatements and erroneous performance history, and (b) proceeds from AlphaSector since September 2013, when F-Squared removed the misrepresentations from marketing materials.

         Pre-September 2013 Proceeds

         At trial, the SEC presented ample evidence of the marketing significance of Present's claims about the strategy's pre-2008 track record. Present specifically touted the strategy's supposed response to market downturns in August 2001 and October 2007. These assurances about AlphaSector's “airbag” were particularly salient for F-Squared's clients, especially given the post-meltdown era in which the statements were made. Present marketed the strategy as shock-tested live during previous downturns. Present points out that almost all of the revenue that F-Squared generated from AlphaSector arose after the index's first full year in use. However, all of the proceeds during this period are causally connected to his misstatements. For instance, between October 2009 and September 2010, in its second full year in use, AlphaSector raised the vast majority of its new assets from clients that already had invested in AlphaSector before that period. Those assets are traceable to the misrepresentations that initially inspired confidence in the strategy. Further, later clients sought confirmation from Present that the advertised pre-2008 performance was genuine. Thus, Present fails to demonstrate any “clear break in or considerable attenuation of the causal connection between” his misstatements and any of the assets raised prior to September 2013. Happ, 392 F.3d at 32. Accordingly, the Court orders Present to disgorge all compensation that he earned in relation to AlphaSector before that time.

         Post-September ...


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